When it comes to setting business priorities the things that seem urgent, fun, or that are driven by customers naturally seem to rise to the top.

But managing cash flow is one critical part of a business that regularly deserves your full attention.

Cash management directly affects everything else in your business including: 

• How profitable the business is 

• How big a cash reserve you can build for your business; 

• How much and when you can invest in growth; and 

• How long your business can keep going, even in a tough economy. 

Too often, business owners become the victim of poor cash planning or “swiss cheese” cash management -- letting cash leak out of the business simply by not paying enough attention to expenses.  

In fact, 82% of businesses fail because of cash flow problems. This makes sense, because even if there are other underlying problems; when a business runs out of cash, it also runs out of time to address product-market fit, pricing, or anything else.  

Being proactive and strategic in managing cash is critical to your business's success. And the best way to do that is to start by crafting a detailed cash flow plan. 

Let’s start at the beginning: What is a Cash Flow Forecast? 

A cash flow forecast (aka cash plan) is a tool for looking at exactly when you expect cash payments to be coming into your business compared to the bills and expenses that you need to pay out during that same time period. 

In other words, your cash flow plan is where you plot the timing of when cash will be coming into and out of your bank account on a weekly, monthly, or quarterly basis.  

How is a cash flow plan different from other forecasts?

In our work as virtual CFOs for high-impact companies, CFO on Speeddial creates a cash flow budget or cash forecast as the most specific and detailed form of financial planning. In a cash forecast it’s best to only include sales that have already been booked or expenses already committed to at the time when you expect that revenue to go into (or out of) your bank account. In comparison, for a high-level forecast companies generally plan for a longer timeframe and for future sales or purchases that haven’t happened yet.

How to Build your Cash Flow Forecast

In its purest form, a cash plan is dead simple. There are only 4 things you need to follow and track to create a cash plan for your business.

Ending cash = Starting Cash + Cash In - Cash Out

If a cash flow plan is dead simple, why does it feel so complicated? 

First, nothing ever goes according to plan. Even after painstakingly putting it all down in a spreadsheet cash won’t actually hit the bank when you expect or need it. As with every other type of plan you’ll need to adjust on the fly as real life interacts with your cash forecast. 

Second, things happen at different times. For example, an insurance bill could be paid quarterly; payroll could be weekly or bi-monthly; rent is monthly. Customers could routinely pay you on the first of each month, but honestly, that never happens. Unwinding all of this is critical to being able to predict your actual cash needs. That’s why it is essential to be as specific as possible with the items, dates, and amounts you include in your cash budget.

Using your forecast to improve strategic cash management (ie, make clear decisions):

I recommend that you create a four to six-week cash flow forecast. Pick the time horizon that works best for your business, based on how far in advance your product or service sells; and how quickly conditions change in your industry.  

At the beginning of each week, update your forecast and roll it forward one more week so you maintain that four to six-week horizon. If you find weeks where your Ending Cash enters a low point, or even a negative balance adjust the timing of when you collect payments, or when you pay bills until you create enough cash flow to cover the expenses. 

Overall, watch for ways to improve your cash flow by reducing expenses, improving how quickly you get paid, or asking for longer payment terms from some of your key vendors.  

There is huge (HUGE) value in slowing down to look at every bill and every payment to place it on the cash budget. This will reveal exactly how much is happening in your bank accounts (or credit cards) that you’re not fully aware of. To be honest, that’s a good enough reason to create a detailed cash plan and maintain it on a weekly basis; especially when cash is tight in and you want to understand exactly what is going on in your business. 

When you monitor cash in and cash out on a weekly basis for a month or a quarter you will almost certainly find expenses that you can reduce or eliminate, and that is cash in the bank! 

I have a cash flow plan: now what?

CFO tip:

The detailed work you’ve put into the cash flow means that you now have a very clear picture of how money flows into and out of your business. You can use that information to look at revenue growth options. If cash is tight now, you can use our free Revenue Calculator to figure out how much additional sales are needed to cover all your bills, pay down debt and have cash profit left in your bank account.

This can be a great way to set clear revenue targets for the next 12 months, and then watch how the revenue flows into your cash plan!